Could Verizon, AT&T Follow T-Mobile in Ending Subsidies?

The biggest U.S. wireless carriers are watching T-Mobile USA’s experiment with ending smartphone subsidies, but they aren’t sure if subscribers are ready to make the change.

Major wireless carriers tend to subsidize the cost of smartphones by hundreds of dollars, in return for locking customers into two-year contracts. The strategy allows for a lower upfront cost to customers for the smartphone, but carriers make up for the expense with the monthly service fees over the course of a contract.

The upfront payment to the handset makers does hit the carriers’ margins at the phone’s purchase; as a result, some wireless companies around the world have started to shift away from the practice.

“That is a great thing,” Verizon Communications Inc. Chief Executive Lowell McAdam said in an interview at the Consumer Electronics Show in Las Vegas. He joked that Verizon would support U.S. regulators in banning phone subsidies.

Although he likes the idea of ending subsidies, he questioned whether U.S. customers are ready for that type of shift because they have been conditioned to getting lower-cost phones for so long.

Verizon “could move to that very quickly” if people wanted it, he said.

AT&T Mobility Chief Executive Ralph de la Vega said Monday the company is watching the T-Mobile strategy, and AT&T could make a similar move if it becomes popular, but the company isn’t focused on the issue.

“Our research says that they [customers] don’t like paying upfront for the phone,” he said. “There didn’t seem to be the appetite for that kind of plan.”

T-Mobile Chief Marketing Officer Michael Sievert said most of the company’s new customers choose plans that don’t include a subsidy, and he is confident consumers will adopt the model when they realize it can save them money.

Under the traditional model, customers don’t realize that they are paying for the phone with their monthly bill, he said, and can overpay if they keep their phone for awhile. “We intend to challenge some the norms in the industry,” he said.